Best gold stock: Barrick Gold or Royal Gold
The market is close to historic peaks. Global debt levels are near historic highs. Interest rates are close to their historic lows. These are very good reasons why investors might want to diversify into investments that have historically been viewed as safe havens, such as precious metals.
There are different ways to do this including buying a miner like Barrel gold (NYSE: OR) or take a little different path and buy a streaming and royalty company like Royal Gold (NASDAQ: RGLD). Here’s a look at why one is probably a better option than the other.
Start by choosing growth
Barrick and Royal Gold share one thing in common: owning physical gold or an exchange-traded fund that invests in bullion doesn’t offer growth. Simply put, the only upside potential for gold coins or bars is an increase in the price of gold.
However, miners and streaming companies can invest in their businesses and grow. This is a key advantage that makes them better long-term options for most investors looking for diversification through an investment in gold or precious metals. This is not a guarantee of success, of course, as there are risks that come with the activity of investing in capital, but over time the upside potential is probably worth the risk.
What’s interesting is that the risk of capital investment is part of the symbiotic relationship between miners like Barrick and streamers like Royal Gold. Streaming, to keep it simple, is when a company provides cash upfront to a miner for the right to buy gold (or other metals) at a future date and at a reduced rate. .
For example, in a recent streaming deal, Royal Gold paid ERO Gold Corporation $ 100 million, with a potential of an additional $ 10 million, in exchange for the right to buy 25% of the gold from the mine. ‘NX gold in Brazil at 20% of the spot price. Once certain production targets have been reached, this rate drops to 40% of the spot price. ERO Gold, meanwhile, will use the cash to invest in the continued development of the mine.
ERO Gold wins because it has access to growth capital without having to tap into the capital markets, which would increase leverage levels or, if shares were issued, dilute current shareholders. Royal Gold wins because it gets low prices for gold. And both are winning because their businesses are growing.
However, for most investors, streamers will likely end up being the best way to add gold exposure to a portfolio. A look at Barrick and Royal Gold will help explain why.
Streamers have valuable advantages
Barrick is one of the largest gold mines on the planet, with interests in or full ownership of 14 gold mines and three copper mines. Royal Gold has streaming and royalty deals with 41 producing properties. This gives Royal Gold a material advantage on the diversification front, as it has more eggs spread across more baskets than Barrick.
But it does not stop there. Royal Gold also has investments in 19 development projects and 127 investments that are in the early stages of development and exploration. That’s a total of 187 properties.
Next, investors need to consider the costs. Building and operating mines is expensive, labor intensive and risky. Barrick has to bear these charges, which sometimes end up at higher levels than initially expected, but Royal Gold does not. Its cash placement is pre-established and known in advance.
As for operating costs, Royal Gold has only about 30 employees. Barrick has over 20,000 employees and 23,000 contractors on its payroll. They operate under totally different cost structures and work intensities. And given the dangerous nature of mining, Royal Gold’s risk profile is significantly lower.
Yes, a mine accident will impact the amount of gold he can buy. However, the company does not have to deal with the other problems that such a situation would create (such as getting the mine back to working order and paying for any damage caused).
Royal Gold has greater diversification, locked into low gold prices and low operating costs. This leads to wide margins which tend to be resilient in both good and bad gold markets. The chart above comparing Royal Gold and Barrick’s margins confirms this.
But let’s take the streaming example above, where the cost of Royal Gold is set as a percentage of the spot price. This agreement guarantees a generous profit margin. Barrick’s costs tend to be more rigid and take longer to adjust, so falling gold prices can cause margins to drop significantly.
On the flip side, rising gold prices may result in larger margin improvements for Barrick, but most investors shouldn’t try to time movements in gold prices. Thus, the Royal Gold model, which is more resilient throughout the commodity cycle, appears to be a better option.
This is why you want a streamer
Streaming and royalty companies like Royal Gold are a bit outside the normal path for many investors. However, if you are looking for a way to add precious metals to your portfolio, it is worth digging in and getting to know Royal Gold and its peers, including Franco-Nevada and Wheaton Precious Metals.
In summary, the streaming business model has material advantages over gold mining and direct investment in gold. Royal Gold, however, is the cheapest option of this trio, looking at book value and price versus profit. It also has a number of catalysts that should help improve performance, including new investments that are coming online.
Overall, Royal Gold seems like a better long-term option for investors than a miner like Barrick Gold.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.